Business, Columns

Smart Women, Smart Money: Tax Season

Dear Emmy, have you any last-minute tips to reduce my 2015 taxes?

2016 has already begun, so I am afraid that we are a bit beyond the “last minute.” One recourse would be to back-date a financial transaction to last year – but that would be illegal, except in one case: making an IRA contribution.

You can contribute to a Traditional, SEP, or SIMPLE IRA by April 15 to reduce your adjusted gross income for last year by an equal amount. The less taxable income you have, generally the smaller your debt to the IRS. Just be certain to designate this contribution for 2015 and not 2016.

Include transaction on line 51 on Form 1040, or line 34 Form 1040A. Then subtract the contribution amount from your earnings to come up with your adjusted gross income. Of course, there are some important caveats.

To qualify for an IRA deduction in 2015, you cannot be eligible to participate in a company retirement plan. If you are, then the upper limit of your adjusted gross income must be $61,000 for singles, or $98,000 for married couples filing jointly, to receive a full or partial payback.

Additionally, if you are not eligible for a company plan but your spouse is, your IRA contribution is fully-deductible as long as your combined gross income does not exceed $183,000. If neither of you are an active participant in an employer-sponsored retirement plan, you may both deduct your entire Traditional IRA contribution, up to your applicable limit.

For 2015, the maximum IRA contribution, for Traditional and Roth accounts combined, is $5,500 – or $6,500 if you are age 50 or older. For the self-employed, the maximum for non-catch-up contributions is 25 percent of your 2015 compensation – capped at $53,000 for a SEP or $12,500 for a SIMPLE IRA.

It is difficult for me to say exactly how much a retroactive IRA contribution would affect your taxes because it depends on your age, income, and family size.

There is another good reason to reduce your adjusted income by making a “last minute” IRA contribution: if you underestimated your earnings when applying for a healthcare subsidy under the Affordable Care Act. If your 2015 income ends up being higher than you projected, you may have to pay back all or part of the excess subsidy you received. This could be painful.

People who received a Covered California policy and mistakenly thought their income would be less than 400 percent of the federal poverty level – $47,080 for singles or $63,720 for couples not claiming children – may have to pay money back unless they find a way to get their adjusted income below federal thresholds. Making a “last minute” IRA contribution could solve this problem. Speak to your tax professional to help you make the best decision.

As a final reminder, I have reserved the Barth Room at the Crowell Library on Saturday, Feb. 27 to discuss the stock market’s unusual volatility. Join me at 10 a.m. for this financial education presentation and open forum. I will make the time to address everyone’s specific questions. To reserve you seats, please RSVP at (626) 943-8833.

Securities and Advisory Services offered through National Planning Corp. (NPC), member FINRA/SIPC, a Registered Investment Advisor. EH Financial Group, Inc. and NPC are separate and unrelated companies.  NPC does not render tax advice.

February 25, 2016

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